Comment: 500 Days of Djindjic

Tuesday, 6 September, 2005

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Biljana Stepanovic

While many criticisms can be levelled at the government of prime minister Zoran Djindjic, it does represent an undeniable break with the past and a move towards democracy and free markets.

From the ruins left by former leader Slobodan Milosevic, the new government has laid a basic foundation for economic reform and for the country's eventual accession to the European Union in its first 500 days.

This worthy achievement has often been overshadowed by an incessant feud between Djindjic and his political rival, Yugoslav president Vojislav Kostunica.

According to Kostunica's Democratic Party of Serbia, DSS, and opposition parties - who are former Milosevic supporters - the Serbian government has not made a single step towards promised reforms; is solely preoccupied with its own political image; and is mired in corruption.

Another of the Djindjic's problems is the legacy of poverty bequeathed by the former regime. According to 2000 study, more than a third of the population were on or below the poverty line and 18 per cent lived in absolute destitution.

Under Milosevic's rule, the average monthly salary was 107 German marks (53 euro) and the average pension 75 marks (37 euro) - an 80 per cent decline compared to 1990. The average monthly salary today remains low but has increased to around 130 euro, with the average pension at 100 euro.

Pensions have fallen ten per cent compared with December, as they are no longer tied to salary increases - but at least they are paid regularly.

It is difficult for the public to let go of the illusion that there is a quick fix to Serbia's economic crisis and that living standards could soon return to 1990 levels, when Yugoslavia enjoyed a Gross Domestic Product, GDP, of 2,700 US dollars per capita. By the end of the Milosevic era, per capita GDP barely reached 1,000 dollars.

Faced with waves of criticism in the run-up to Serbian presidential elections scheduled for September 29, Djindjic has argued that his government has ushered in an indisputable rise in living standards.

He has also pointed towards international support for his government's reforms, which has generated crucial loans and financial assistance.

Economic analysts agree that the Djindjic government has pushed through three vital laws - on taxes, privatisation and the labour market - in a timely manner. These reforms, alongside the issue of cooperation with The Hague tribunal, were crucial to persuading the international community to start negotiating aid and loans for Serbia's economy.

A whole host of revenue legislation was overhauled in March and April last year, only two months after the government was formed. Tax is now paid on total revenue, closing the loophole that allowed evasion through fictitious reporting of minimal earnings and profits. Moreover, all budget income is publicly documented and no citizen is exempt, which was most certainly not the case during the corrupt Milosevic era.

The Serbian government also adopted a ground-breaking law on privatisation at the end of June last year that enabled the scrapping of "socially-owned property", an unworkable form of ownership created in the old Yugoslavia and unknown anywhere else in the world.

The primary goal of the privatisation legislation is to see firms managed by their real owners. Up 'til now, a firm's workforce was formally in control, but in reality the system gave rise to incompetent executives who carried no responsibility. That bizarre arrangement saw many factories effectively pillaged by unaccountable managers, leading to the virtual collapse of the industrial system.

Foreign investors were not ready to enter the Serbian market as long as they were prevented from sacking a single employee - even those who had been given permanent leave.

The new government has mustered the courage to lay off 15,000 workers from the Kragujevac-based Zastava car factory. Some 10,000 were made redundant as a result of the National Bank of Yugoslavia's decision to liquidate four of the country's biggest banks.

Economists estimate that out of 1.5 million people officially employed in the country, around a third are holding "surplus" jobs that are unnecessary and obsolete. According to some reports, about 350,000 to 500,000 people work unofficially in the so-called "grey economy".

With presidential elections scheduled for September and early parliamentary elections in sight, it is difficult to imagine the government taking the risk of allowing more redundancies, no matter how much sense it makes for economic reform.

On taking office, the Serbian government defied a powerful lobby that had grown rich through petrol imports, by issuing a decree on the oil derivatives trade. This permitted only crude oil imports and obliged importers to use local refineries, eliminating petrol smuggling.

The authorities also made significant changes to construction laws, threatening prison sentences of up to three years for owners of buildings built without valid permits.

Permit fraud was a visible example of the lawlessness of the Milosevic years, depriving the state of tax revenue and enabling the growth of a powerful "construction mafia".

The government has yet to succeed in defeating a chronic and corrupt bureaucracy that deliberately prolongs the granting of building permits.

Another success for the Djindjic government has been reducing the rate of inflation that grew to lethal proportions under Milosevic.

At least part of the credit for controlling price rises belongs to the governor of the National Bank of Yugoslavia, Mladjan Dinkic, who has reformed the system, shut down the worst banks, provided for the dinar's convertibility and ensured that the exchange rate has remain static for two years.

A firm hand on monetary policy is crucial for a country that has lived for years under the constant threat of hyperinflation. In 1993, Serbian citizens survived inflation of several million per cent. This year its forecast to reach just 20 per cent.

Djindjic's government has brought international financial assistance into Serbia for the first time in more than a decade. From October 2000 until the end of June 2002, the country received and spent around 1.2 billion dollars of aid.

The authorities have secured a new three-year standby arrangement with the International Monetary Fund, new loans from the World Bank and 280 million euro for the overhaul of the energy sector. Thanks to this international injection, Serbia has survived two winters without serious power restrictions.

But along with the successes of the past 500 days, Djindjic's government has made some serious mistakes.

Many of the opposition's criticisms are valid. For instance, the government has failed to convincingly fend off accusations of corruption, which has cast a long shadow over the leadership and frustrated its progress.

Djindjic has been unable to account for the decline in industrial production, which has fallen by 0.8 per cent in comparison to last June. Nor can it explain why exports are up only ten per cent and are worth 882 million dollars, while imports have shot up by 30 per cent to 2.4 billion dollars.

Opponents claim the authorities lack the political will to enforce legislation designed to tax profits made illegally under Milosevic's rule. In May last year, an ambitious law was adopted to do so, amid claims it would secure a billion euro worth of revenue. Only 50 million euro has been collected so far.

Foreign investors say the judiciary is the weakest link in economic reform efforts. Inefficient, outdated and still favouring debtors over creditors, the courts are far from the kind of fair arbiter needed in a competitive marketplace.

There are other missing pieces in the reform puzzle. The government has failed to adopt a number of laws needed to complete the economic reforms already launched, including legislation on mortgages, bankruptcy, denationalisation and the financing of political parties.

Considering the mess that it inherited and the economic reforms it has put in place, Djindjic's government has no reason to fear the early parliamentary elections that the DSS and the opposition are insisting on. This government has secured concrete results that should be presented to voters in a clear, convincing manner.

If the government acknowledges that it has fallen short on some promises but explains why, Djindjic's adversaries may find the ground shifting under their feet, as the opposition is yet to show what it would have done differently or more efficiently.

Kostunica's DSS decided to hand over its role in decision making and resigned from the government. As for the other opposition parties, they were in power for the last decade, and they left the former Yugoslavia in ruins.

Biljana Stepanovic is an economics analyst with the Belgrade weekly NIN